Investors of any wealth level can now invest in startup ventures, ushering in what industry officials say is a watershed moment that "democratizes" angel investing.
In mid-May, the last of the Securities and Exchange Commission's three-pronged measures under the Jumpstart Our Business Startups (JOBS) Act took hold when the agency's Title III crowdfunding rules became effective, allowing startups to raise capital from non-accredited investors via crowdfunding.
Under Regulation Crowdfunding, as it is being dubbed, "almost anyone will be permitted to invest" in these offerings, said Jim Dowd, managing director of North Capital Private Securities, "which will ensure that a broad universe of companies will, for the first time, have access to new sources of capital."
The JOBS Act of 2012, which created an exemption for securities-based crowdfunding transactions that meet certain requirements, directed the SEC to adopt rules to implement those requirements.
With the equity crowdfunding rules now in place, companies will be able to start raising capital through what SEC Chairwoman Mary Jo White called a "new regime" in recent comments at a meeting of the International Organization of Securities Commissions. The May 16 effective date, White said, "has been anxiously awaited by many small entrepreneurs and the advisors who help them."
Dowd agreed that he's been anticipating the Regulation Crowdfunding rules for nearly four years, noting that "the market may not take off with a bang," but neither did general solicitation under Regulation D. However, Dowd said he believes Reg CF "will quickly become a critical source of capital for small businesses."
Other than the repeal of Glass-Steagall, Dowd argued that "the JOBS Act is perhaps the most important change in securities laws in over 80 years."
During his 30 years in financial markets, Dowd said, he's "been lucky enough to be involved in three developments that have been transformative for the industry: the start of the derivatives market in the '80s, the rise of the hedge funds in the '90s and the JOBS Act," which he maintains "will have a far-reaching impact for years to come."
As of press time in mid-May, FINRA — which is charged with regulating broker-dealers that intend to develop internet funding portals — had approved five funding portals. The SEC's Office of Compliance Inspections and Examinations is responsible for helping oversee those portals.
The two other capital-raising options that were opened under the JOBS Act before Title III finally kicked in enable private companies to engage in general solicitations of investors for exempt offerings under Rule 506 of Reg D, and also raised the cap on certain Regulation A (Reg A+) offerings to $50 million, up from the previous cap of only $5 million.
Since Reg A+ became effective in March 2015, issuers have publicly filed over 85 offering statements, while others have taken advantage of provisions in the rules that allow for non-public staff review of draft offering statements before publicly filing, White said. The SEC has also qualified over 30 offering statements from companies seeking to raise approximately $500 million.
Raising Capital; Building Vibrant Markets
White told IOSCO members at the event held in Lima, Peru, a few days before the Title III rules took hold, that there's "significant interest and excitement" in the U.S. about the use of securities-based crowdfunding, which she said the SEC hopes will give small businesses "another tool for raising capital and building vibrant markets."
Companies have many options for raising money to fund their businesses, White said, "and those seeking capital will ultimately be in the best position to decide whether crowdfunding or another capital-raising option will work best for them."
White conceded, however, that the agency is — and will continue — to monitor the risk inherent in crowdfunding.
